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How are retirement accounts addressed during divorce?

Of the many assets that will be divided during a divorce, it may be easy to overlook or underestimate pension plans, 401(k)s and other investment accounts. According to the U.S. Department of Labor, more than 46 million people in Illinois and across the country have employer-provided retirement accounts. This kind of property is subject to division no matter the age of the divorcing couple as long as the funds were acquired during the marriage.

The issue with addressing these accounts is that it can be a complicated process that involves a number of tax implications. According to a report in Forbes magazine, such assets are divided according to the following: 

  •        There are state laws that dictate how an IRA will be split.
  •        Federal guidelines are used to determine how a 401(k) or 403(b) will be divided.
  •        You may need a qualified domestic relations order to divide certain accounts.

A QDRO is used to let the administrator on the account know how to pay out benefits for the spouse who does not own the asset. Through using a QDRO, the funds in the account may be withdrawn without incurring a penalty and deposited into the spouse’s own retirement fund. Forbes points out that the order must be completed prior to divorce in order to prevent a costly mistake. 

These orders are not necessary for every retirement fund, such as an SEP or an IRA. If you are dealing with a military or government account, it is important to know the specific rules that apply to those situations for division.

Once the funds are divided from any account, spouses should understand any taxes or penalties that may be applied in order to understand the true value of the asset and ensure an equitable split.

 While this information may be useful, it should not be taken as legal advice.

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